Institute of Islamic Banking and Insurance Mohammed Amin 12 February 2013
Presentation outline Disclaimer Speaker’s details Purpose, scope and methodology of the study Current status Key findings and recommendations Next steps Slide 2
Disclaimer Taxation is a complex subject and almost all issues require specific professional advice. Nothing in this presentation is intended to constitute professional advice. The speaker accepts no responsibility to anyone who may act, or refrain from acting, as a result of anything shown or said during this presentation. Slide 3
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Mohammed Amin Mohammed Amin is an Islamic finance consultant. Previously he was a partner in PricewaterhouseCoopers LLP and led their Islamic finance practice in the UK. He is: • a chartered accountant, a chartered tax adviser and a qualified corporate treasurer • a Council member of the Chartered Institute of Taxation • a member of Editorial Advisory Board of New Horizon, the magazine of the Institute of Islamic Banking and Insurance Amin has spoken on Islamic finance in over 20 cities covering every continent except Antarctica. Many of his articles and presentations on Islamic finance can be found on his website: www.mohammedamin.com Slide 5
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Purpose Ascertain the tax treatment of common Islamic finance structures in MENA countries. Focus on cross border transactions. Identify tax obstacles to Islamic finance. Provide policy recommendations. Slide 7
Study team Qatar Financial Centre Authority - sponsor International Tax and Investment Center Ernst & Young – Questionnaire management PwC Malaysia – Malaysian questionnaire Researchers: Mohammed Amin – lead writer Salah Gueydi – Qatar Tax Authority Hafiz Choudhury - ITIC Slide 8
Sponsor: Qatar Financial Centre Authority Strategically located as an important platform for conducting business in the rapidly growing Middle East and North Africa region, the Qatar Financial Centre (QFC) has firmly established itself as a thriving location for global and regional financial services firm looking to capitalise on the opportunities offered by the region. The QFC Authority is the commercial and strategic arm of the QFC. The QFC Authority also serves as a ‘think-tank’ for the State of Qatar on financial services, in addition to acting as an interface between participants who would like to use the QFC as a platform to expand within the region and the State of Qatar. The QFC has a specific set of regulations covering the taxation of Islamic Finance transactions, and a QFC entity has already been used in the structuring of a Sukuk funding a property development in Qatar. The QFC is delighted to be able to support further research into the developing subject of the taxation of Islamic Finance transactions by the thought leaders in this area. Slide 9
Scope - MENA Region Study information received No information for this phase Egypt Algeria Jordan Bahrain Kuwait Iran Libya Iraq Oman Lebanon Qatar – main territory Morocco Qatar – special rules in QFC Palestinian Territories Saudi Arabia Syria Turkey Tunisia United Arab Emirates Yemen Slide 10
Taxes covered Taxes on income payable by companies, individuals and trusts (where applicable.) Taxes on capital gains Taxes on the transfer of assets, such as real estate transfer tax, where such taxes are not recoverable by the purchaser VAT excluded from this initial study Slide 11
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Structures analysed Four structures chosen for study. 1. Commodity murabaha / tawarruq – economically equivalent to a conventional loan. 2. Ijarah sukuk (onshore and offshore SPV) – economically equivalent to issuing a tradable bond. 3. Salaam – economically equivalent to financing by committed forward purchase of goods. 4. Istisna – economically equivalent to construction finance. Detailed transaction descriptions Slide 13
Commodity murabaha or tawarruq Immediate sale with deferred payment Bank Customer 105 paid in 12 months time 100 paid today Overseas Murabaha contract Frontier Sale for immediate Sale for 100 paid payment immediate today payment Your country Commodity seller Commodity buyer Slide 14
Ijarah sukuk with onshore SPV Frontier Charity Issue sukuk Pay issue price 100 Investors Special Purpose Periodical payments Vehicle (SPV) representing SPV’s profits 5 Sell Pay Lease Note: Unwind building price 100 transactions at end Pay rent periodically 5 of sukuk not shown. Owner Your Overseas country Slide 15
Transaction description for sukuk with onshore SPV 1. Owner is a company located in your country. 2. Today Charity which is not connected with Owner creates a company called Special Purpose Vehicle (SPV) located in your country. 3. Owner owns a building which it purchased many years ago for $20 million. Today, after SPV has been formed, Owner sells that building to SPV for a price of $100 million payable in 30 days’ time. 4. Today Owner gives SPV a purchase undertaking by promising that if in five years’ time SPV offers to sell the building to Owner for a price of $110 million, Owner will buy. 5. Today SPV gives Owner a sale undertaking by promising that if in five years’ time Owner offers to buy the building from SPV for a price of $110 million, SPV will sell. 6. Today SPV rents the building to Owner with a lease which is five years long. The rent is $5 million per year, payable once a year with the first payment in 12 months’ time. 7. SPV creates sukuk certificates under which it holds the building, the lease and the benefit of the Owner’s purchase undertaking as trustee for whoever is the owner of the sukuk certificates. 8. Between today and day 30 the sukuk certificates are sold to investors for a total price of $100 million. All of the investors are located overseas. On day 30, SPV pays the $100 million to Owner which is owed for the purchase of the building. 9. 10. In 12 months’ time, Owner pays rent of $5 million to SPV. SPV immediately passes that rent on to the investors in proportion to their ownership of the sukuk certificates. The same happens at the end of years 2, 3, 4 and 5. 11. Also at the end of year 5, Owner offers to buy the building from SPV for a price of $110 million. SPV agrees to sell, as it has promised to do under the terms of its sale undertaking. Owner pays $110 million to SPV and SPV transfers ownership of the building to Owner. SPV passes the $110 million sale price of the building on to the investors in proportion to their ownership of the 12. sukuk certificates. The sukuk certificates are cancelled as they have no further value as SPV has no remaining assets. 13. 14. After completion of the above transactions, as SPV should have no assets and no liabilities, SPV will be liquidated. Slide 16
Ijarah sukuk with offshore SPV Charity Issue sukuk Pay issue price 100 Overseas Investors Special Purpose Periodical payments Vehicle (SPV) representing SPV’s profits 5 Frontier Sell Pay building price Lease 100 Pay rent Note: Unwind periodically 5 Your transactions at end Owner country of sukuk not shown . Slide 17
Salaam Promise to purchase the goods when they become Overseas Bank available - wad Frontier 105 paid in 12 months time Your country Goods sold and delivered in 12 100 Goods produced months time paid and delivered in today 12 months time Salam contract Customer seeking Supplier of goods capable goods in future for of being fully specified own use or trade, e.g. farmer requiring finance Slide 18
Overseas Istisna Frontier Building or ship sold when Your country finished, assume 12 months Customer wanting Bank building, ship 105 paid in 12 months time or similar Second istisna contract Building or 100 paid Note: Here the istisna ship, in stage contracts run for only 12 payments ownership months. In practice likely to passes when be for longer. Price paid finished Istisna contract under second contract set to give appropriate profit rate to bank. Note: As an alternative to Construction company, the second istisna contract, shipbuilder or similar there could be a wad given by the Customer, promising to purchase the building when finished. Slide 19
Specific questions 68 questions about law and tax treatment in the host country, including tax treaty implications. Slide 20
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Commodity murabaha Tax deductibility of Customer’s expense Does transaction create a taxable presence for Bank? Withholding tax Impact of tax treaties Transfer taxes Slide 22
Ijarah sukuk Taxation of transfer of building to SPV Deductibility of rental expense Income tax position of SPV Withholding tax on payments to investors Taxation of sale of sukuk certificates Taxation of SPV on closing sale of building Impact of tax treaties Transfer taxes Slide 23
Salaam Does transaction create a taxable presence for Bank? Withholding tax Impact of tax treaties Transfer taxes Slide 24
Istisna Does transaction create a taxable presence for Bank? Withholding tax Impact of tax treaties Transfer taxes Slide 25
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